Understanding Safe Leverage

Posted by becky on December 24th, 2019

Brokers and investors are attracted to Contracts For Difference (CFDs) and Forex in general due to the leveraged opportunities they offer, the low initial capital required to commence trading and the perceived ease of trading. However many CFD traders are oblivious to the risks and lack understanding regarding the impact of leveraging. 

CFDs can be defined as high-risk derivative devices typically used by traders to take geared, short-term positions in volatile markets. Leverage is the big attraction. Trading on margin via CFDs requires lower initial cash deposits than the equivalent share purchase but you are still exposed to the same potential profit and loss.
The Power of Leverage

The leverage offered by your broker magnifies the underlying movement of the trade share which can be positive or negative. CFD traders often look only at the extra financial power that leverage gives them and ignore the fact that leverage is a double-edged sword. Firstly it is important to gain an understanding of all the elements of CFDs and the leverage effect they can offer via the margin feature

5 Tips For Damage Limitation

1. If you wish to lessen your risk you can trade CFDs with no leverage so with 5,000 cash in your trading account you would take positions not exceeding 5,000. 
2. Top CFD brokers offer mini contracts on certain markets so if you feel unsure about what effect the movement of one point against your position will have on your running profit/ loss you can cut back the size of the trade. 
3. All good Forex Brokers offer demo accounts for you to try before investing real money. It is widely acknowledged that whilst not entirely accurate, these systems allow you to gain confidence and understanding without risking your finances.
4. When using Electronic Communication Networks (ECNs) you may want to utilise the “damage limitation” tools available in your suite such as Stop Loss (SL) and Take Profit (TP).
5. Be realistic about your timeframe and budget. Do not trade with money you cannot afford to lose nor on markets which require constant supervision and research if you are unable to dedicate such time to your trading.